Latin America Economic Forecast

Economic Snapshot for Latin America

February 18, 2015

Sluggish economic growth in Latin America reflects recession in Argentina, Brazil and Venezuela

Latin America continued to face important challenges at the outset of 2015 with several factors working against the economy, among which are persistently low commodity prices, weak currencies and tepid growth. Economic growth began to pick up some pace in the region in Q3 2014 following a sharp deceleration in Q2. However, economic activity is expected to have grown at a tepid rhythm in Q4 2014 and is foreseen continuing in the same vein through the first half of 2015. This sluggish economic growth is mainly due to the recession looming over Brazil that is expected to continue until Q2 2015. The outright recession Argentina is experiencing is also projected to continue until the first half of 2015, while Venezuela’s total output is expected to continue contracting until the first quarter of 2016. Conversely, economic activity in Chile, Colombia and Mexico is projected to continue growing, albeit moderately, in the coming quarters.

Commodity prices were highly volatile at the beginning of the year, with crude oil prices taking center stage. Following an uninterrupted downward trend that began in July 2014, global oil prices have stabilized in recent days. The stabilization mainly reflects a decline in investment in new projects in the United States, as several U.S. oil companies have announced a delay in new investment plans. Global prices for agricultural products as well as for metals also recovered somewhat from recent lows. Nonetheless, the recent recovery in commodity prices is likely to be short-lived as downside risks persist. Expectations that growth in China will be slower this year could dampen demand for oil, iron ore and copper. Regarding agricultural products, favorable weather conditions in Argentina have offset the negative impact that the drought in Brazil has had on corn and soybean prices. Commodities production is significant in Latin America, therefore a sustained drop in prices poses additional challenges for many of the region’s economies.

Oil producers’ economic woes dampen region’s growth prospects

Latin America’s growth outlook was revised down markedly this month. LatinFocus Consensus Forecast panelists slashed the region’s GDP growth forecasts by 0.3 percentage points over the previous month and now see the economy growing 1.2%. Growth at this rate represents just a mild improvement over the 1.0% increase projected for 2014. This month’s downward revision was broad-based and reflects reductions in the growth forecasts for 8 of the 11 economies surveyed, including sizable downward revisions for Brazil, Ecuador and Venezuela. Moreover, panelists left their growth estimates unchanged for Chile and Paraguay. Argentina was the only economy for which panelists raised their projection, although it is still expected to experience recession this year. Next year regional GDP growth is expected to accelerate to 2.7%.

The sharp drop in global oil prices is taking a heavy toll on oil-producing countries. Panelists lowered their forecasts for oil exporters Colombia, Ecuador, Mexico and Venezuela. In fact, the negative impact of falling oil prices on exporters more than offset the positive effect lower prices have had on importers. In Mexico, the drop in oil prices of over 50% prompted the government to announce a series of cuts to its 2015 budget. In Ecuador, President Rafael Correa’s administration plans to increase non-oil taxes by 16.5% in order to compensate for the dramatic fall in oil exports earnings. Panelists downgraded Brazil’s economic outlook, mainly due to weak domestic demand and political turmoil. Forecasters slashed Venezuela’s projection, reflecting President Nicolás Maduro’s government’s erratic economic policy.

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BRAZIL | Economic activity remains in the doldrums amid political scandal

Brazil’s economy grew meagerly in Q3 2014 and more recent data suggest that the economy is still struggling. Retail sales recorded the largest contraction on record in December and economic activity hit a six-month low. The weak economic data, combined with a deteriorating outlook for 2015, has put downward pressure on the real, which hit an over-10-year low against the U.S. dollar on 11 February. Meanwhile, on top of the challenge of boosting the ailing economy, the government is under increasing pressure in Congress over the Petrobras scandal. President Dilma Rousseff’s approval ratings have fallen to an all-time low as evidence is mounting that her party was involved in the corruption at the state-owned oil company.

Brazil’s outlook for 2015 is deteriorating quickly. Low commodity prices are anticipated to weigh heavily on export revenues and the country is experiencing a severe drought. While the government is focused on boosting growth, analysts are doubtful that the economy will turnaround quickly. LatinFocus Consensus Forecast panelists expect the economy to contract 0.1% in 2015, which is down 0.6 percentage points from last month’s forecast. For 2016, panelists see the economy growing 1.7%. 

MEXICO | Sharp drop in oil prices prompts government to cut spending

The economy is estimated to have remained on strong footing in the last quarter of 2014. However, economic news was less encouraging at the outset of this year. Manufacturing is off to a weak start and a sharp drop in consumer confidence augurs sluggish household spending in the months ahead. Moreover, the persistent decline in oil prices prompted the government to announce a series of budget cuts in January. The spending cuts total USD 8.3 billion, which is equivalent to 0.7% of GDP, and the energy sector will assume the largest burden of the cuts.

The economic outlook for Mexico is positive, although downward risks do persist. If oil prices remain low over the course of the year, they will erode fiscal revenues and may delay or deter investment in oil exploration. Our panelists cut their growth forecast for Mexico by 0.1 percentage points over the previous month and now expect the economy to expand 3.2% in 2015. In 2016, the panel projects that the economy will expand 3.7%. 

ARGENTINA | Economy to contract in Q4, but increased reserves provide some respite 

Argentina’s economy continues to struggle; recent data point to another drop in economic activity in Q4 following the contraction recorded in Q3. Monthly economic activity was weak in October and November and industrial production and exports fell again in December. Meanwhile, in mid-January, Argentina received USD 400 million in the fourth installment of the USD 11 billion currency swap signed with China last year. China’s financial support, along with capital controls and negotiations with exporters, made it possible for the Central Bank to maintain its reserves above USD 31 billion in early 2015. With increased reserves, Argentina has no urgent need to access international financial markets, so a debt resolution with the holdouts is not likely to come any time soon. Argentina is becoming increasingly dependent upon China; on top of the currency swap, the countries signed a series of investment projects and trade agreements in Beijing in early February.

Large macroeconomic imbalances, combined with the government’s unwillingness to make policy adjustments and a deteriorating external environment, suggest that the recession is going to continue this year. Panelists expect the economy to contract in 2015, although they did revise their projections up slightly from last month and now see the economy declining 0.2% this year. Panelists see Argentina’s economy recovering in 2016 with a 2.3% expansion.

VENEZUELA | Economy firmly entrenched in recession, government unveils new exchange rate system

Venezuela’s economy contracted for the third consecutive quarter in Q3 2014, thus confirming the country’s economic decline. On 12 February, the government launched an overhaul of the exchange rate system which includes a new mechanism called Simadi that allows for legal trading of the bolivar. Venezuelan authorities are hoping that Simadi will help ease dollar shortages and counteract widespread black market activity in the country. The sharp fall in oil prices has put pressure on government finances as oil is the main source of Venezuela’s dollar income and this has resulted in large goods shortages.  

Recession, skyrocketing inflation and falling oil prices are causing Venezuela’s outlook for 2015 to deteriorate rapidly. Against this backdrop, the LatinFocus panel of analysts shaved off 0.6 percentage points from last month’s projection and now see a 4.4% contraction in GDP for 2015. For 2016, the panel sees GDP recovering somewhat and expanding 0.3%.

INFLATION | Brazil pushes up inflation expectations while double-digit inflation persists in Argentina and Venezuela 

Inflation in Latin America ended 2014 at 12.7%, according to more complete data. This is the highest rate of inflation the region has seen since 1996. Higher inflation in Argentina and Venezuela caused the jump in regional inflation in 2014. LatinFocus Consensus Forecast panelists expect it to rise even further in 2015 and thus revised up their estimate this month. Forecasters now see inflation in Latin America ending 2015 at 13.6%, which is up 0.3 percentage from last month’s Consensus. The upward revision is mainly due to higher inflation expectations in Brazil; Argentina and Venezuela are foreseen recording double-digit rates. LatinFocus panelists expect the regional average to return to single-digits in 2016 and close the year at 9.9%.

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